Senators cobbling together a sweeping energy and climate bill are at the early stages of divvying up valuable emission allocations among regulated firms and well-financed interest groups.

Their decisions are big ones, worth hundreds of billions of dollars over the climate program's roughly 40-year lifespan. Already, lawmakers are fighting over who should get a bigger share of the allowances, as well as the broader philosophical mechanics of pricing greenhouse gases.

Interests pressing for Senate allocations run the gamut. Investor-owned power companies say they need more than a third of the free allocations for their customers to help them compensate for higher energy bills. States that stepped up first on climate policy claim their early actions deserve recognition. Other voices in the debate include retirees, wildlife conservationists, religious groups and advocates for keeping tropical rain forests standing.

Sens. Joe Lieberman (I-Conn.) and Lindsey Graham (R-S.C.) said yesterday they were getting closer to unveiling their "breakthrough" proposal on allocations with Sen. John Kerry (D-Mass.), promising a bill that would be both business and consumer-friendly. Graham and Lieberman said about 60 percent of the revenue raised by the government would immediately go directly back to the public as soon as the climate program starts.

Sources briefed on the senators' proposal say it has been dubbed "reduction and refund" instead of the "cap and trade" term that has been demonized by opponents.

The senators said that each industrial sector -- electric utilities, petroleum refiners, manufacturers -- will face different emission limits and startup dates. As such, the allocation plan for each also will be different.

For transportation fuels, the senators said an idea being offered up by BP America, ConocoPhillips and Shell Oil Co. involves a "linked fee" that would be tied to the carbon market price for the other industrial sectors.

"The money we generate comes from the companies. It's an assessment on what they do in the carbon world," Graham said. "They're creating a carbon product, they're going to pay a fee. Some of it will be passed on. Some of it will be absorbed. But the money we collect from them gets passed back to the consumer, which holds them harmless. Bill Gates may not get it, but most people in my state will. And any money not going back to the consumer from this linked fee has to go to do something the country needs, like retire the debt, or I won't support it."

Industry officials earlier this month suggested funneling some of the linked fee revenue into the Highway Trust Fund, à la federal gasoline taxes. But Graham said yesterday that the idea had lost traction. "That may be more problematic, but the one thing I can tell people about the money, if you don't get it, it's going to help your kids."

The senators also said they are planning to direct the electric utilities' allocations back to the public and industrial customers via local distribution companies, or LDCs.

Graham said the approach has an added layer of complexity because it is tied to the four additional years before major manufacturers must begin compliance when compared with the electric utilities.

"Say we've got a cement plant. We're going to make sure all the money collected in the utility area, the allocations are given so it goes right back to the customer, so that the homeowner doesn't see a spike in their energy bill, nor does the cement company. That's a breakthrough," Graham said. "We want to make sure that their indirect costs associated with the utilities, that they're held harmless and they're taken out of the system for a period of years because we don't have the technologies yet."

Making the task even more complicated for Kerry, Graham and Lieberman, budget rules in the Senate require a "haircut" of one quarter of the allocations to keep the bill deficit-neutral over its lifetime (E&E Daily, Oct. 29, 2009). That means the overall pot is smaller than the House, where Democrats did not face the same restrictions as they went through a brutal allocation battle of their own en route to passing legislation (H.R. 2454 (pdf)) last June by a narrow 219-212 margin.

"The allocation issue is obviously going to be, and always has been, one of the most significantly complicated and at times divisive aspects of the debate," said Jason Grumet, executive director of the Bipartisan Policy Center.

To EEI or not to EEI?

Lacking a complete bill or draft, many of the regulated industries are reluctant to comment on the senators' proposal.

"Everything is under discussion," Tom Kuhn, president of the Edison Electric Institute, said yesterday as he left a closed-door meeting with the Senate trio.

For the House bill, sponsors used an allocation formula created by EEI where the industry's allowances would be split 50-50 between companies based on their historic emission levels and retail sales.